How to break the "spend now, save later" cycle

LibbyWells

NORTH PALM BEACH, Fla. (bankrate.com) -- On the cusp of each new year, Americans vow to lose weight, eat right, quit smoking and exercise. We're big on physical goals, but rarely talk of financial ones. However, the warning bells are starting to sound.

"We're in what I call the 'now generation.' Everything is instant gratification."

C. L. Wayne Moore, University of Tennessee

The Commerce Department put a microscope to our fiscal habits and found that incomes jumped 5.9 percent last year, but spending rose 7 percent and savings dropped to an all-time annual low of 2.4 percent after taxes.

In other words, we're living large in a booming economy, but not thinking about the future.

"We're in what I call the 'now generation,'" says C. L. Wayne Moore, assistant professor of family economics at the University of Tennessee extension service.

"We don't think about saving, even for an item. We see something we want and buy it right away. Everything is instant gratification."

The two must-do's

Experts agree there are two must-do's for anyone who wants to put their money habits on the right track: record expenses and set a budget.

Norma Tharp, spokeswoman for the National Foundation for Consumer Credit's north Georgia region, has an exercise in self-awareness that she recommends trying for one month: Keep account of every penny you spend.

"I'd be surprised if you're not surprised at what you find," she says.

Recording daily spending, whether with pen and paper or a computer program, can cure the impulse itch and prepare you to set goals and a budget. You might discover that the money for the rainy day fund you never thought you could build is going to fast food and too many trips to the golf course each month.

Once you see where your money is really going, you can make adjustments based on your needs and goals, not what the pie charts tell you.

For example, 10 percent of after-tax income is the recommended minimum for savings. But that's not a possibility for many.

"A lot of people have the misconception that if they can't do 10 percent, don't do it at all," says Sunny C. Orr, assistant director of the Center for Financial Responsibility at Texas Tech University.

Just start saving -- even $5 a week

"If you have to start out with 1 percent, do that and then scoot it up gradually. Five dollars a week can make a difference."

Uncle Sam's take on how much Americans are saving is a tad bleaker than the reality. Commerce Department figures account for investments in retirement plans, interest earnings and saving accounts, but do not include capital gains from the stock market, which is the key reason U.S. wealth is accumulating at its highest level in decades.

Even though an estimated 48 percent of Americans own stocks, most don't have gains large enough to excuse them from saving.

"We are making lots of money in the stock market and housing markets, so real asset accumulation is not so bad," says Richard Thaler, a professor of behavioral economics at the University of Chicago.

"However, neither of these can go up forever, and if the stock market tanked many would be caught very short."

What sinks us -- two miscalculations

Don Blandin, president of the American Savings Education Council, says Americans' lack of financial vision is tied to two miscalculations: "They tend to overestimate how much they will receive from Social Security and underestimate how long they will live," he says.

"These two things combined can be very dangerous."

"One place people typically under-utilize for advice is their bank. That's a great resource."

Don Blandin, American Savings Education Council

As a result, he said, people don't modify their spending habits. "They're buying two lattes a day, the latest paperback books and fashions, spending $10 a week on lottery tickets."

One area where consumers splurge is housing. "They tend to go out and pick a place to rent or buy and then figure out how they can afford it, instead of the other way around," says Orr.

The other money-muncher is food. A two-income family of four earning about $55,000 a year after taxes spends almost $3,000, or nearly one-third of their annual grocery budget, eating out, according to the federal Bureau of Labor Statistics.

"People don't realize how they can make that money grow," says Blandin. "If they had put that into a mutual fund four years ago, they'd have lots of money now."

Five financial personalities

The ASEC categorizes people into five financial personalities. You can take the quiz at their Web site and hold a mirror to yourself.

Planners determine how much they need to save and are in control of their finances.

Savers are careful with money but aren't confident that they are investing wisely.

Impulsives spend today and let tomorrow take care of itself.

Strugglers have difficulty saving because of day-to-day financial responsibilities.

Deniers are almost deliberate in their refusal to face reality.

Blandin says the planners are the ones who achieve their goals, whether it's to stash enough for retirement, college, a laptop computer or an emergency fund.

"Calculating the goal is very important," he said. "Saving is not a one-size-fits-all exercise."

Then, once the money tracking and budgeting are done, you must decide how to grow what's left.

"The best place to start is an employment-based retirement plan. That should be the first place you put your money," says Blandin.

Start with a 401(k)

Employer plans such as 401(k)s are the most popular savings vehicle, according to a 1999 survey by the Employee Benefit Research Institute. But the EBRI found that 25 percent of workers whose companies offer such a plan do not participate.

"Not taking advantage of your company's match in a 401(k) plan is just dumb," says Blandin.

Second, consider investing in equities. "That's the fastest way to build your nest egg, and the only way to stay ahead of inflation," he adds.

Those who are new to the money shuffle can take heart: There is a treasure trove of information at their fingertips -- on the Internet, in the workplace and around the corner, at their local branch.

Says Blandin, "One place people typically under-utilize for advice is their bank. That's a great resource."

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